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Healthcare Spending in Indonesia

A recent J Health Econ paper describes the changes to the system of public health financing in Indonesia.  Today, I review this article.

Public Health Expenditures in Indonesia

In the Suharto Regime, district health offices implemented centrally determined policies, and “a large network of public health clinics (puskesmas) was set up to deliver primary outpatient care. In 2001, Indonesia’s health sector decentralized, following far-reaching reforms that involved fiscal, administrative and political decentralization.”

Under the current decentralized systems, districts have a lot of autonomy.  Districts are free to set user fees for public health and medical services and call allocate resources to any public health program they wish without having to justify their spending patterns to the central government.

Indonesia still does have some centralist features.

“The central government sets employment conditions for civil servants, including those working in public health service providers financed by district governments. It also finances and runs social safety net programs for the poor, such as targeted price subsidies for public care. Total health spending is split almost evenly between the central/provincial level on one hand and the district level on the other hand; in 2005, they accounted for 48% and 52% of public health expenditures respectively.”

Most of the districts funding come from the central government.  The funding comes from three major sources:

  • 56% general allocation grant (Dana Alokasi Umum – DAU)
  • 12%: shared non-tax revenues (i.e., natural resource revenues)
  • 11%: shared tax revenues (i.e., property and income taxes)
  • 3%: Specific allocation grant (Dana Alokasi Khusus – DAK)

The district’s own revenues fund about 10% to 16% of expenditures in the district.

Decentralization lead to a significant increase in public health spending.  Between 2001 and 2004 overall public health spending increased from 9,251 billion Indonesian Rupiah (IDR) to 16,703 IDR, a 21.8% average annual increase.

The question is, does this increased funding lead to increased public health spending at the district level and increased utilization.



Filmer and Pritchett (1999) note the lack of correlation between public health spending and child mortality and conclude that governance, or the way in which resources translate into actual programs, and crowding out of the private sector by the public sector are the missing chains that explain the low correlation.

McGuire (2006) shows that in a cross section of developing countries, access to maternal and infant health programs is correlated with decreased under 5 mortality, while public health spending is not. This indicates that it is the quality of the implemented programs that matter, and not the spending per se.

Kruse et al. Findings

Using panel data from 207 Indonesian districts between 2001 and 2004, a paper by Kruse et al. finds that the large increases in transfers from the central government large resulted in increased health spending by the district.  The authors estimate an elasticity of 0.9 (i.e., the district would spend $90 out of the $100 transfer from the central government on public health services).

The authors do not find significant crowd-out; increased public health spending does not reduce the private provision of medical services.  Increased public health spending also appear to increase health care utilization, particularly for poorer individuals.



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